Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

RightNow Technologies Inc. (NASDAQ:RNOW)

Q3 2009 Earnings Call

October 22, 2009; 4:30 pm ET

Executives

Greg Gianforte - Chief Executive Officer

Jeff Davison - Chief Financial Officer

Todd Friedman - Investor Relations

Analysts

Brendan Barnicle - Pacific Crest Securities

Laura Lederman - William Blair

Steve Ashley - Robert W. Baird

David Hilal - FBR Capital Markets

Keith Weiss - Morgan Stanley

Michael Huang - Thinkequity Llc

Andrew Shah

Thomas Roderick - Thomas Weisel Partners

Patrick Walravens - JMP Securities

Sasa Zorovic - Janney Montgomery

Brian Schwartz - Piper Jaffray

Ross MacMillan - Jefferies & Co

Goran - Roth Capital Markets

Operator

Good day everyone and welcome to the RightNow Technology’s third quarter 2009 financial results conference call. (Operator Instructions)

At this time I’d like to turn the call over to Ms. Stacie Bosinoff; please go ahead ma’am.

Stacie Bosinoff

Thank you. Good afternoon everyone and thank you for joining us on RightNow’s third quarter 2009 conference call. Joining me on the call today is CEO and Founder, Greg Gianforte, and Chief Financial Officer, Jeff Davison. Before turning the call over to the company, I will read our Safe Harbor statements.

During the course of this call, we may make projections or forward-looking statements regarding our future conditions or events which may drive our future business, current and new products and services and their performance, the size and strength of our markets, our future financial performance and outlook for the company.

These forward-looking statements may include, but are not limited to statements about revenue growth and profitability, our future strategic plans and perceived growth opportunities, perceived opportunities related to the social platform, market acceptance of our products, and other statements relating to our operating results. These forward-looking statements speak only as of today, and are based upon the information currently available to us. This information will likely change over time.

By discussing our current perception of our market and the future performance of the company and our products with you today, we are not undertaking an obligation to provide updates in the future. We caution you that such statements are just projections and actual events and results may differ materially from what we discuss today.

Please refer to the documents that file with the SEC, specifically our most recent annual report on Form 10-K, and quarterly reports on Form 10-Q. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections and forward-looking statements.

As a reminder, we are providing a supplemental data sheet, as well as an updated investor presentation on the Investor Relations section of our website, that contains historical information for easy reference. During the course of this call, we will also be discussing certain non-GAAP financial results. We direct your attention to our reconciliation of GAAP which can be found in our company’s earnings release, which is posted on the Investor Relations portion of our website.

With that, I will turn the call over to Greg.

Greg Gianforte

Thanks Stacie. Good afternoon everyone. I want to spend my time today focusing on our customers. It is the core element of our business that our success, our strategy and our thought direction is driven by focusing on what our customers want and need. This focus translates into another great quarter, both in terms of financial results and our overall business. One highlight was our action to combine the social experience with the rest of our solution to our recent acquisitions.

Revenue in the quarter was $38.7 million above our guidance. Non-GAAP EPS was $0.12, also ahead of our guidance. We signed seven deals over a million dollars and signed our first deal for our new social offering, while building a healthy pipeline on the heals of our acquisition.

Through the first three quarters, we’ve now delivered $0.29 of non-GAAP earnings per share, well above our original full year guidance and a testament to our focus on growing the top line while delivering solid earnings. Jeff will discuss the financials in greater detail later, but I’ll say that I am very pleased with the performance of everyone at the company this past quarter.

Turning to our customers, it was another great quarter for RightNow. As you know, we have a track record of proven success with our customers. Those of you who are coming to our summit next week will have a terrific opportunity to engage directly with our customers and hear about their success using RightNow. We take great pride in our customer success, especially when they are recognized for building better customer experience.

There are a lot of product awards out there and we win plenty of them. A customer’s winning awards for the customer experience they deliver means so much more. For one thing, it’s a great sales and reference tool for our other customers and prospects, who as you won’t be surprised to hear, put a lot more stock into the references of their peers and into the words of a magazine’s testing lab.

Second, it helps our customers cut through the noise, press releases and fancy events, where vendors can show great power points, but they can’t show an actual product available for delivery. I know this may sound overly simplistic, but if you want to have a success in a market, sort of the requirement for most customers that you have an actual product.

On that note, Gartner released their latest magic quadrant for e-service, which includes web self-service, chat and e-mail management. It also includes knowledge base, whether they are delivered in the cloud or out of the cloud Once again, not only was RightNow the clear and undisputed leader in the category, we are also the only company even listed delivering enterprise level solution in asses model. While other companies talk about their future product plans for 2010 and beyond, we continue to deliver results by focusing on satisfying our customers today, and our customers are truly satisfied.

At the most recent Gartner convention, they handed out the Gartner one-to-one awards for CRM excellence. RightNow customers claimed five key awards at the conference, more than any other vendor. iRobot who you recall from our analyst day, won the highest honor for their implementation. In their presentation they quoted a 25% increase in customer satisfaction, a 30% reduction in phone call volume, and a 97% self-service rate. Distance Minnesota won for improving their student service, while seeing enrollment jump 18%, 30% and 85% over the past three years.

Motorola was the third award winner and was honored for reducing customer support cost by over $10 million per year. Black and Decker was also a winner for raising their customer satisfaction rate to 89%, while reducing call wait times 62%, and eHarmony was the fifth winner with a 97% customer satisfaction rate. These success stories breed additional success. They lead to new prospects, they lead to expansions within existing customers, and they lead to a deeper relationship between RightNow and our customers that drive our solution development.

It is through these deeper relationships that we saw the need in the market for a fully integrated social platform. We are seeing customers struggle within the highest level of customer experience, when the conversations were happening outside their four walls. That is what led us to an exhaustive evaluation of every major social vendor in the market. As you would expect, we looked at everything from technology, to rapid solution, to customer references and so on.

Introducing a social platform into the RightNow solution discussion has generated immediate return, with deals closed in the quarter and more joining the pipeline every week. The benefits for customers to embrace a social solution are obvious to a customer service or marketing VP. They can create a better customer experience through building communities. They can ship cost out of the call center by enabling customers to help other customers. They can build brand loyalty and foster innovation and ideation, gather feedback, and bolster the data in their knowledge base.

Integrating community into the RightNow Knowledge Foundation also allows the community to tap directly into the same knowledge as the website or the call center, which in turn delivers a consistent experience and gives organizations the ability to learn more about their customers through those social interactions.

One of our first social customers this quarter was Husqvarna, a global leader in outdoor power equipment; products like chainsaws, lawnmowers, leak blowers and such. Husqvarna plans to use our solution to provide a community, where consumers can show their pictures and tell their stories as to how they are using Husqvarna product. They also plan to create a private community for dealers to interact with one another, sharing tips and stories about how to best market and sell more products. They also plan on deploying a support community for their customers.

Since our announcement of the acquisition, we are seeing great traction in the field of customers who already had social on their to-do list. Our customers immediately understand the power of integrating the social, web, and contact center experiences, and we are ramping those discussions rapidly. We also had continued success with penetrating the call center. We want to deal this quarter with Tiscali, a large UK based ISP and telecom provider.

Tiscali is an existing RightNow customer who first deployed us a few years ago to solve the basic customer support problem namely; how do I maintain superior customer experience and reduce costs, while my subscribe base is growing. We have since extended our relationship with Tiscali to include web self service, email management, call center desktop, sales automation, marketing automation and enterprise feedback management.

In the third quarter we added several hundred additional feeds to be deployed around the world in the Philippines, Ireland, Lithuania and India. As you have heard us illustrate in the past, the combination of cloud delivery and our 33 available languages have been dialoged makes RightNow a very attractive solution for organizations who want to take advantage of the global contact center operation. You recall that in April we announced a government cloud offering designed to meet the stringent security privacy standard of civilian agencies and the defense department.

In Q3, the US Air Force renewed and expanded their use of RightNow, which included the decision to migrate to this new government cloud offering. Before this year the Air Force was restricted from using a SaaS solution in order to comply with Department of Defense security regulation. Now, they will be able to take full advantage of our latest capabilities such as Section 508 compliant customer portal, contextual workspaces, agent scripting, guide and assistance and desktop workflow.

To our knowledge, we believe we are the only major software vendor to have a government approved contact center offering delivered in the cloud. All told, in Q3 we signed 56 new customers, enclosed new and expansion business with customers including Epson, E-Fusion, FICO, Gathy-Renker, Lucent-Alcatel of The Mens Wearhouse, Nike, Photo Box, [TEBO] and Virgin Mobile. We believe this continuing momentum is directly related to our focus on meeting the needs of a large consumer organization.

B2C organizations have fundamentally different requirements than B2B organization. It’s not FSA in the call center. It’s thousands of millions of consumers generating millions of interactions everyday seven days a week. The interactions come through the web, through email, through chat, over the phone, from communities and so on.

The contact centers are large, they are complex and they are often in multiple countries and in multiple languages. For RightNow customers we are simply solving a different and more complex problem beyond what traditional CRM companies are trying to accomplish.

Our momentum is also related to the breadth of our solution. We believe we provide the most comprehensive end-to-end multi channel customer experience platform in the industry and our expansion into social experience further extends that advantage.

We also believe our August ‘09 release further advances at leadership role, adding greater functionality for the agent desktop and enhancing our cloud monitoring solution, all of which is built on our knowledge foundation which has been delivered in the cloud since 1997.

I’ve been amused to see some competitors announcing that they have the best or smartest or even the first knowledge base in the cloud without even having a product. I don’t know about some of our competitor’s customers, but our customers have never had much success implementing a press release. They tend to like actual product a lot better.

At our summit next week, we will be focusing heavily on the addition of social experience to our solutions, as well as our usual great list customer presenters. We have keynote presentations from MySpace and Disney. MySpace was a big competitive win for us in Q2 this year. We’ll be talking about how they go about delivering great customer experiences to a customer base of more than 215 million users.

Disney will be focusing on how they build brand royalty and how that is woven into their customer experience. The Gartner award winners will be presenting as well as a bunch of our partners including Deloitte, Convergys, Open Methods, Sterling Commerce and many others. It really will be a great event, and I encourage you all to join us if you can. If you can’t join us, many of our keynotes and customer presentations will be available on the summit website following the event.

Also, at the summit we will be demonstrating our November ‘09 release. This quarterly release will be the first major integration of our social solution and will be a big focus for our company. Additionally, RightNow November ‘09 provides out of the box functionality related to Section 508 of the Disabilities Act. This feature is important to all customers and especially our government client as part of our expanded government cloud offering.

November ‘09 also includes, for the first time RightNow Order Management which allows order entry directly from the RightNow agent desktop. Once released, we plan to hold a webinar for you, so you’ll be able to get a demo of the full solution and get a more detailed briefing from our product team.

One last note before turning call over to Jeff. You hopefully saw our announcement last week that Steve Singh, the Chairman and CEO of Concur has joined our board. I’ve known Steve for a long time, and Concur certainly has been a model of success for SaaS companies as well as all software firms in general. I’m pleased that Steve has joined our board and I look forward to his counsel in the years to come.

So, in closing, it was another great quarter. Great results, great new customers, great new products, I hope that many of you will be able to join us at our summit next week. As we said previously, we won’t be holding a formal analyst day given the timing and overlap with earnings season, but for those of you who can come, I know you’ll find the customer conversations enlightening and their candor refreshing.

For me personally, it’s my favorite time of the year, because I get to spend so much time with our customers. Now, if you have an earnings call to listen to, it will probably much nicer listening to it by the Lake of the Broodmoor than sitting in your office.

With that I will turn it over to Jeff.

Jeff Davison

Thanks Greg. Revenue in the third quarter was $38.7 million above our guidance. Looking at the break down of revenue; recurring revenue was $29.7 million, an increase of 9% from $27.4 million last quarter, and a 15% increase over $25.9 million in the third quarter last year.

Professional service revenue was $9 million for the quarter consistent with Q2 and in line with our expectations. The mix of revenue across geographies for the quarter with 72% Americas, 19% EMEA, and 9% Asia-Pac.

Bookings for the quarter were $51.7 million. As I have mentioned on previous calls, bookings will fluctuate quarter-to-quarter depending on several factors including sales in the period and the make up of renewals, contract length and timing of renewal. That being said, we are very pleased with our record bookings this quarter.

I will take a moment to answer one question I know someone will ask later. There seem to concern last quarter that our record Q2 bookings drained the pipeline. We again delivered record bookings in Q3. So, in anticipation of the question, let me add that we believe our strong results this quarter were also not a result of draining the pipeline. We enter Q4 with what we believe is a strong pipeline, and we are especially pleased with the social deals that have been added.

For the third quarter, the average first year contract value was approximately $112,000, which is up from last quarter and last year. We had seven deals over $1 million, 83 deals between $100,000 and $1 million, and 388 deals less than $100,000. The average contract term was consistent with historical averages at approximately 20 month.

Our solutions enabled 620 million customer interactions this quarter. Strong verticals in the quarter included high-tech, public sector, telecommunications and retail CPG. On expenses, my comments are before stock-based compensation. We continue to make progress on our long-term target with total gross margins at 71% for the quarter compared to 70% in Q2 and 64% in Q3 last year.

We delivered a 31% professional services gross margin consistent with last quarter. The increase in total gross margin is directly related to the shift in our revenue mix toward more recurring revenue, as we said would happen. Total operating expenses for the quarter were $23.7 million or 61% of revenue compared to 63% of revenue last quarter. This was an increase of approximately 800,000 over Q2.

Headcount at the end of the quarter was 792, up 5% from 756 at the end of Q2. Approximately half of the employee growth from Q2 was due to the acquisition. We are very pleased to report an operating profit of $3.7 million or 10% of revenue, which is an increase from $2.5 million or 7% of revenue in Q2.

On the bottom line, we recorded a GAAP profit of $2 million or $0.06 per share. Excluding stock-based compensations our non-GAAP net income was $3.8 million or $0.012 per share well ahead of our guidance.

Next on the balance sheet and cash flow statement. Cash generated from operations was $4.9 million for the quarter, which is $11.9 million year-to-date ahead of where we were at this time last year. Capital expenditures were $1.4 million for the third quarter and $3.9 million year-to-date.

Additionally I will note that cash used in investing activity includes the [hide, live] acquisition consideration of $5.9 million. The purchase price allocation to the balance sheet included $2.1 million of intangible asset and $3.6 million of goodwill.

One thing we noticed was that very few of you updated your model to adjust for the guidance we provided when we announced the acquisition. I will remind you that we anticipate the acquisition will add $1 million of additional quarterly operating expense and is expected to be accretive to earnings in the fourth quarter of 2010.

DSOs were 69 days for the quarter, an improvement from 74 days last quarter. Approximately 39% of the business this quarter included deferred or periodic billing term, which means that that portion of the business is not recorded on the balance sheet and accounts receivable or in deferred revenue until it is actually invoiced.

The majority of our periodic billing terms are quarterly or annual. We ended the quarter with total cash investments of $93 million. Average weight of diluted shares at the end of the quarter were $32.4 million.

Now turning to guidelines; for the fourth quarter, we expect revenue to be in the range of $39 to $40 million. We expect non-GAAP earnings per share, which excludes stock-based compensation to be in the range of $0.04 to $0.06 and GAAP earnings per share to be in the range of negative $0.01 to $0.01 positive. For the year this equates to full year revenue of approximately $150 to $151 million, non-GAAP earnings per share of $0.33 to $0.35 and GAAP earnings per share of $0.09 to $0.11.

We expect stock based compensation to be approximately $1.8 million for Q4 and $7.9 million for the year. We expect capital expenditures to be approximately $6 million for 2009. We are forecasting $32.5 million fully diluted shares outstanding for the fourth quarter and the full year.

One last comment about your model. An area where there is a very wide variances on our future tax expense. As I have said before, I expect an increase in our tax provision in 2010 while it’s hard to predict in which quarter that will occur we expect approximately a 20% tax rate off of GAAP net income for 2010.

With that, I will turn the call over to questions.

Question-And-Answer Session

Operator

(Operator Instruction). Your first question comes from Nandanam Bhadiyan - Deutsche Bank.

Nandanam Bhadiyan - Deutsche Bank

Question on the overall environment and specific verticals, I know you talked about the verticals that you continue to set into. Were there any particular ones that were stronger that are starting to show signs to bounce back?

Greg Gianforte

Yes, good question. I’d say overall environment really hasn’t changed that much. Clearly we had a record booking quarter, so it was a very strong quarter, but there are a lot hurdle we are jump through. The message that I’m going to give you here are very consistent with the messages I gave you in Q2. We have not seen the dam break loose at this point, although we did post record quarters.

We did mention in our prepared comments, the high tech and public sector were really the two standouts during the quarter as you might imagine. Public sector in the U.S. federal business at the end of the fiscal year, and we all saw concentration in high-tech.

Operator

Your next question comes from Brendan Barnicle - Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

I just wanted to follow up, Jeff on your comment about the tax rate. So given that increase in tax rate as we look at sort of a non-GAAP number for next year and from what we have seen from bookings growth so far, is it still safe to assume that even with that increase in tax rate we would see some increase in earnings growth.

Jeff Davidson

Yes. Our plan for next year while we are not getting guidance yet is that we are going to progress towards the operating margin goals that we have out there, we talked about existing 2011 as our target. So that would indicate earnings growth next year and I think if you work with your models, and you have the 20% rate through next year and that 20% is on the GAAP net income. So use that for your tax expense even when you come to your non-GAAP, you will see earnings growth on a non-GAAP basis.

Brendan Barnicle - Pacific Crest Securities

Is there a way to get to like a non-GAAP tax rate than we would find through that.

Jeff Davidson

The non-GAAP that we have is just stock-based compensation, and I haven’t clearly gone through the exercise of breaking out the tax effect about that and we don’t tax effect it, and I haven’t really planned to.

Operator

Your next question comes from Laura Lederman - William Blair

Laura Lederman - William Blair

Yes, nice quarter, just a few questions. One, can you talk a little bit about the type of deals in the pipeline for HiveLive, how large they are or may be another way to answer that, how much do they increase the contracts for your other products, are these standalone social networking deal, and also social network, and who are you competing with for that business?

Greg Gianforte

So first on the size of the deals, a typical ARR annual value of a social deal for us ranges from $50,000 to $150,000 something like that. We are in the handful of deals that we’ve signed in this very short period of time after announcing their one, two and three year deals. So you could do the math on that just multiply the number in terms of the bookings figure.

Who do we compete with? I think, I don’t know that there’s anybody else that has a social capability integrated with the workflow back in the context. So that’s our unique differentiation. What do customers compare us against? We have on premise vendors like Jive, you have companies like Lithium, which is really just a forum capability, it would be firms like that.

Laura Lederman - William Blair

Also on the subject of competition, can you talk a little bit about call center and deals that you’ve been seeing lately, who’re you seeing the most, is it Siebel, are you seeing any salesforce, who’re you seeing more of and less of in the call center setting?

Greg Gianforte

Let me comment more generally on the whole competitive space. We made comment in the Q2 call, that we had seen an improvement in our competitive win rate, and that continued through Q3, I wouldn’t say it advanced much further, but we have seen an improvement. I attribute that primarily to the accumulative effect of three years of quarterly releases focus on a very tight target markets, specifically, large organizations with lots of customers. We saw that competitive advantage. So we’re consistently beating sales force, SAP, Oracle and the niche e-service guys.

The one change in the competitive space that occurred during Q3, was obviously salesforce.com’s announcement of service cloud, and I want to spend a minute on that just because I think it warrants a little bit of attention. First let me preface my comments by saying, I have a lot of respect for what salesforces has done with B2B FSA, but what they said in their announcement about service cloud did not line up with reality, and I’ll two points to support that.

The first is, they claim to have delivered the first ever knowledge base in the cloud and I’d say I think that’s what we have been doing for 12 years, and by their own admission it won’t be shipped till next year. The second piece is, they claim during their call to have 8,000 customers on their service cloud, and I don’t know what those customers are using it for, but in the competitive deals we’ve been in they’ve been unable to produce credible references that have any scale at all, namely over a 100 seats.

I was amused following their event to see that some reports just repeated everything they said is gospel truth. I would encourage you all to Google the term “hype as the service.” This is a third party consultant and some following dialogue around this topic, I don’t think this is a good thing for our industry, but it’s the reality of what we’re having to deal with.

Also as I said earlier, Gartner released their Magic Quadrant here in this past quarter for e-serve and knowledge base. saleforce and InStranet were not even listed on that chart, there were a whole bunch of tiny companies listed, most you’ve never heard of that did make the chart, but Gartner didn’t even give a courtesy mention to salesforce or InStranet there’s just no product there.

So, I’m not trying to be disrespectful, but I do need to call a spade to spade and the service cloud 2.0 thing is really more like low hanging fog in the industry.

Operator

Your next question comes from Steve Ashley - Robert W. Baird.

Steve Ashley - Robert W. Baird

My first question is on customer interactions, I think you said $620 million, if that’s true that would be down sequentially, just kind of looking back over the numbers that would be kind of first sequential kind of decline and it would have slowed the growth there to 8% year-over-year, I’m wondering am I correct with my numbers and if I am maybe some little color there?

Jeff Davison

Steve you are correct with the numbers that were reported before. What I need to point out is, we discovered in the last two quarters we had a couple of unusual spikes that we reported in those numbers. So we put those out and the data sheet that was posted today has correct numbers out there for the last two quarters. So if you go back and check that you’ll see that it has trended upwards if not as significant as it had appeared, because we did have a couple of instances where configuration had caused a spike in the reporting.

Steve Ashley - Robert W. Baird

Then my other question is, just kind of high level, if we look at the recurring revenue grew 9% sequentially, if we look at deferred revenue kind of flat and I guess in our minds we had always kind of equated rise in deferred revenue with the rise in recurring revenue, but we did have a disconnect here. I wonder if you could just talk about that in some of the dynamics that kind of led to you being able to produce strong recurring revenue without growing the deferred revenue.

Jeff Davison

So when I’ve been giving the bookings number in the past and I’ve been giving the percentage of the bookings that actually recorded off balance sheet or not on the books, been trying to help you guys track why deferred revenue isn’t growing, because it has been pretty much constant. It’s because, we’re signing more business that isn’t invoiced until future periods and so it’s not getting recorded in deferred revenue.

Now, I have visibility into the total gross deferred is what I call it, which is the on balance sheet deferred plus the off balance sheet deferred and when I look at those numbers. Those numbers grew 9% sequentially, and total growth grew 15% over Q3 of last year. So it’s pretty consistent with what you’re seeing on the recurring revenue growth line.

Operator

Your next question comes from David Hilal - FBR Capital Markets.

David Hilal - FBR Capital Markets

Just maybe a quick follow up on that, Jeff, did you say deferred to total i.e. what may not be on the balance sheet, was up 9% sequential and 15% year-over-year.

Jeff Davison

Yes.

David Hilal - FBR Capital Markets

Greg, maybe you could talk a little bit about renewals, how they say are this quarter, particularly versus maybe the last few quarters where I think there is pressure on renewals maybe across the industry

Greg Gianforte

We didn’t say anything different in Q3 in terms of renewals. We did not quite get a 100% of our renewal value, when we look at it similar to what we so in Q1 and Q2, the ones that we’re not reviewing tend to be bankruptcies, mergers or just some smaller companies going out of business. We’re going to need an improvement in the economy before we see that change.

David Hilal - FBR Capital Markets

Was there a pressure on renewals for people still in business, but maybe renewing that lower dollar amounts?

Greg Gianforte

That’s not a big element. I’m sure there was some of it. Again, we didn’t see anything in Q3 that was different than Q1 or Q2 as it relates to renewals.

Operator

Your next question comes from Keith Weiss - Morgan Stanley.

Keith Weiss - Morgan Stanley

I wanted to go back to the recurring revenue line again, and in light of your guidance for $39 million to$40 million in total revenues for 4Q. It would seem that the sequential growth in that is going to drop off somewhat and the recurring revenue percentage drop off somewhat into 4Q. So I was wondering was there any one time items or catch-up items in 3Q that might have spiked that sequential growth, anything in particular that would slow down in 4Q?

Jeff Davison

In the Q3 revenue, we had a couple of favorable items. One of them was exchange rate, which contributed about $500,000 to that recurring revenue lines on a sequential basis. The other piece is every quarter we’ve got some influence from deals that are actually signed in the quarter and when they come in for the timing of where they fall in the quarter. I wouldn’t say this quarter was significantly different on a front-end or backend loaded quarter. It did have deals in it that brought some revenue in quarter there were a little higher run rate than what we typically see. So, little bit of benefit there in Q3 that I did not specifically factor in Q4.

Keith Weiss - Morgan Stanley

Then on the expense side with the EPS of $0.04 to $0.06, I know HiveLive is going to add about $1 million in OpEx, it looks like after midpoint that you’re operating expenses would go up about almost $2 million quarter-on-quarter, correct me if I’m wrong. So I was wondering if you could comment a little bit about investment rates. Are you guys ramping up your investment rates outside of HiveLive, or ahead of demand or ahead of what you guys see as a building pipeline improving demand environment next year?

Jeff Davidson

We are investing in headcount as we have been all year, and we’re going to continue to grow expensive. Specifically on Q4, on how you kind of reconcile that you’re trying to get through. We’ve got some major events in Q4. So we have three user conference summits going on worldwide and we have the HiveLive. Those two things alone is probably a couple of million dollars of expense in Q4 that wasn’t in Q3.

I’m also expecting to see slightly lower professional services margins in Q4. We’ve run the last quarters at 31%, which has been terrific performance out of that group, but in Q4 we’re making some investments, so there’s few more heads coming on and we’ve got some contractor expenses that I’m expecting to have. So I think we’d be down on that margin 26% perhaps and then when you consider other investments in heads in the company we’ll have higher expense.

Operator

Your next question comes from Michael Huang - ThinkEquity.

Michael Huang - ThinkEquity

Couple of questions, so first in terms of this upcoming customer summit, could you help us understand how attendance will compare to what you saw last year given some of the tops corporate travel environment and how do this event impact pipeline and sales cycles and bookings and closures?

Jeff Davidson

So last year we did one worldwide event in Colorado Springs. This year in part because we knew travel budget is going to be tight, we’re doing three events. We’re doing one in Colorado Springs, one in England, one in Australia. The total attendance of the three events this year is up 20% from last year, that’s a positive thing, although we have to put on three events instead of one.

In terms of its impact on pipeline these events are our biggest selling events of the year. This is where not that we close business at the show, but we plant seeds around future projects. We will be focusing on the social experience, we’ll be showing the November ‘09 release capabilities and we’ll have a lot of best practice seminars to help people open their eyes up about the potential of the investments they’ve already made with us. So there is some color on that.

Operator

Your next question comes from Andrew Shaw - Raymond James.

Andrew Shaw - Raymond James

Just back on the HiveLive acquisition just around the sales force, do you feel like that are sort of a 100% up to speed and integrated into the existing sales base and then as well on the preexisting sales force, they have to speed on sort of selling the HiveLive’s product?

Greg Gianforte

Yes, that’s a good question. What we did there was essentially the HiveLive sales team, which honestly was pretty small became an overlay sales team for our field, and understand we have been working in this social area and pitching the benefit of social via partner relationships for about four years. So I would say, I’m incredible pleased with the ramp we have seen. I’ve never seen a new product get adopted into an organization as fast as this one has.

I was in Europe two weeks ago, I did 12 customer visits in three days and every single one of those customers want to talk about social and how they can apply in their business. So again, very pleased that our field already have a self social, what they didn’t know was specifics of the RightNow customer community, the former HiveLive capabilities and with the overlay approach, we’re able to bring that table pretty quickly.

Operator

Your next question comes from Tom Roderick - Thomas Weisel Partners.

Tom Roderick - Thomas Weisel Partners

Jeff, you stated pretty strongly just a reminder that the record bookings here were not a function of the pipeline being drained and neither the last couple of quarters. I know you guys don’t guide on bookings, but as we look into the fourth quarter and even into next year, this is a level directionally you think you can sustain the bookings at this level or were there any kind of near term effects like the government sector this quarter that may have prompted up just a little bit more than what we ought to be thinking about the coming quarters?

Jeff Davidson

Tom, you’re right, we don’t give guidance on bookings and we’re not planning too. We’re really pleased with the bookings in Q3 with great performance and pubic sector was a big part of it. That being said, the other verticals contributed as well. Going into Q4, it seasonally is higher booking quarter for us and we definitely have a good pipeline. Again, I’m not providing guidance on it, but overall on the direction of bookings our intention is that we’re growing and we’re investing to grow this business and that’s the plan on how we get to our target model. So we look for up into the ray.

Tom Roderick - Thomas Weisel Partners

Jeff, on the bookings number this quarter, I heard you say $51.7 million, but I’m not sure I heard what the year-on-year growth was. So can you give that and then just as you look at this pipeline healthy demand, do you feel like you need more sales capacity going into next year and have you opened up the hiring plans more aggressively on that front?

Jeff Davidson

I think the bookings growth I think it’s 33% over Q3 last year. Last year Q3 was $39 million. On the hiring front, we did plan to hire as we grow the business overtime, is there a spike, I don’t think so. I think that we’ll see hiring across the board.

Operator

Your next question comes from Patrick Walravens - JMP Securities.

Patrick Walravens - JMP Securities

I guess if you could start just by reminding us of the operating margin target that would be helpful?

Jeff Davidson

The operating margin target was 18% to 22% exiting 2011.

Patrick Walravens - JMP Securities

Then Greg, stepping back for a second, if I look at HiveLive, actually we had some nice customers, have you had luck selling your solutions into those and I think you had a pretty good pipeline of opportunities with your pervious partner? How would you approach those and how is that working out?

Greg Gianforte

You are right, HiveLive, did have some good customers, it’s still early days. I mean a handful of deals we closed so far have been four weeks since we completed the transaction. The fact that we completed a handful of deals already is really a symptom of there were things high on people’s to do list. They had to act very quickly or we leveraged the trust we built up with these clients over the years.

The bulk of the ones we’ve closed have been HiveLive sales into the RightNow installed base, and that’s where we see the bulk of the opportunity, because there’s thousands of customers there versus dozens in the existing HiveLive base. The primary partnership we had in the past was with Lithium, a large percentage of their installed base is in our customer base. There were a number of cycles underway.

We ultimately respect whatever decision the customer makes, but we’re making a case of those plan that in fact having a social experience platform fully integrated with the contact center and the web experience is an essential part of delivering great experience to your client and some of these deals we’ve closed here have been reflecting the fact that the customers agree with us and have made the decision to come over to the combined HiveLive RightNow platform and not pursue the Lithium.

Operator

Your next question comes from Sasa Zorovic - Janney Montgomery.

Sasa Zorovic - Janney Montgomery

So I would like to ask regarding how your international business, that how it’s comparing to the domestic one, does it seem that I guess in terms of growth rate in sort of coming out of that, is the pipeline sticking up faster in international than domestically?

Jeff Davidson

Let me comment by region first. I mean the strength, the greater strength we saw last quarter within North America, there’s no question about that. Asia Pacific for us continues to produce ahead of plan. If it was weak area last quarter it was Europe, but they’re also on vacation for most of the quarter, right. So that has an impact.

I still think to write long term model it’s 30% of revenue about from outside of the U.S. It’s kind of interesting when we look at the seven deals that we did over million dollars last quarter four of them came from outside the U.S. I’m not sure how much that tells you because most of the big deal we do with multinational for global deployment, it just depends on where the headquarters. So that’s some color on international. I expect the business to continue to grow and go faster internationally and toward at that 40, 60 split.

Sasa Zorovic - Janney Montgomery

I guess quickly on your split, I guess 50/50 in terms of revenue companies, which is their billion in revenue or the government versus smaller, is it staying pretty much constant?

Greg Gianforte

Yes, it's in the investor deck. Jeff. If the percentage that’s greater than a billion, we combine that with the public sector and that’s well over 60%. I think so less than a billion is it's like 38.

Jeff Davison

We consider government large business. So, we lump it together when we talk about business is over a billion and large government agencies.

Operator

Your next question comes from Brian Schwartz - Piper Jaffray.

Brian Schwartz - Piper Jaffray

Jeff you had mentioned that the pipeline is improving here through Q4. Can you comment how the close rates have been trending so far here through its first month?

Jeff Davidson

On Q4, close rates I wouldn’t say right now we are seeing anything different than what we historically see in this business. I have mentioned before its backend loaded and that means first month of the quarter is usually pretty like.

Brian Schwartz - Piper Jaffray

Greg you had mentioned in your comments here in regard to the macro that you are not seeing much change to the overall macro so far, but I was wondering if you could comment or share with us what you are hearing from your customers in regards to their IT budgets or their operating budgets loosening up here towards the end of the year. If you are seeing any sort of a loosening out there? Thank you.

Greg Gianforte

So the conversations I’m having with clients tend to be lesser on IT budgets or operating budgets it tend to be around key strategic initiatives within the business and the conversation tends to center on gees I better be delivering on great experience or I am going to loose these customers or I need to figure I had a drive incremental revenue and there is money in the budgets when projects support those key initiatives.

So I think that’s the headline. These systems that we are putting into the clients are not discretionary buys, these are systems and that are supporting key initiatives for retention of customers and attracting new customers and I don’t know what else could be more central to the long term differentiation and success of any business

Operator

Your next question comes from Ross MacMillan – Jefferies & Co

Ross MacMillan - Jefferies & Co

Maybe just a financial one first, if I look at either the on balance sheet billings or I look at the combined on and off balance sheet bookings. They seem to grow into the first two quarters of this year by about 3% or 4 % and of course that doesn’t talk to Q4, but Jeff, as we think about growth, how that translates into revenues is it fair to say we should think about that’s a good representation of kind what next 12 months growth is going to look like or I guess some I am trying to think about that in the context of how to think about how revenues flow from those numbers? Thanks.

Jeff Davidson

Yes the bookings it does get difficult actually taking the bookings number and just trying to equate that to what the next 12 months revenue is and that’s why I continue to point out the hesitation or to be cautious about how much emphasis should put on it just because of the renewal from the nature of that.

From a growth rate perspective, if we look at the recovering revenue line that we have had this year, it's around 10% to 12% and if you normalize it for exchange rates, it's about 15% recurring revenue growth this year for the year with our guidance. We think in a more normalized economy we should be seeing rates above 20% and that’s kind of what we expect to see for growth.

Ross MacMillan - Jefferies & Co

Sales force made quite a lot of noise with the relationship with Cisco on the IP Telephony and I guess the telephony side of the contact call center equation. Can you just remind us of some of the relationships you have with contact center IP or telephony infrastructure players and how closely you work with some of those guys for sometime? Thanks.

Greg Gianforte

I would also point out that the announcement that sales force made with specifically for SMB call centers which is not a market that we focus on. So we think there still remains an opportunity possibly even within a firm like that to develop a relationship around the enterprise. Of course Cisco is a very large client of ours; we have 5600 desktops in production at Cisco today.

We continue to have relationships with firms like Interactive Intelligence will be exhibiting next week, they’ve built a native CTI integration to our desktop and they really represent the new breed of SIP based IP Telephony for contact centers. We have talked in the past about a relationship with Genesis. So, those are some of the ones and of course Deloitte who has a focus on our contact center transformation projects.

Operator

Your next question comes from [Gwan Tilwich] - Roth Capital Markets

Gwan Tilwich - Roth Capital Markets

I had a quick question on new deals and I would like to get the percentage on a new deal to go up against sales force currently and about a year ago?

Greg Gianforte

That’s not a specific percentage that we would give, I will say though that I’m looking at a list here, dozens of deals last quarter where we beat www.salesforce.com and I wouldn’t say they are the primary usually they are in the wrong place because I said they can produce references for B2C contact center, but we want business Devry last quarter at Disney and Epson, Jacuzzi, Photobox, Plantronics, Proctor & Gamble and we have a broader product that serves a very specific need for our target customers, which is large B2C organizations and we are very competitive in those environment.

Analyst - Roth Capital Markets

So, I assume also on a seven figure a deal that applies as well?

Greg Gianforte

Yes, especially in the seven figure deals because those tend to be more complex.

Operator

Your final question comes from Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thank you, Greg, I wanted to follow up on you mentioned the order entry piece that you guys are going to be releasing in the November release. Does that start to get you maybe into sort of more traditional ERP type areas, do you see our ecommerce type areas, do you see yourself going in that direction?

Greg Gianforte

Let me explain what we have done. One of the primary workflows that are clients want to automate is revenue generation in the contact center, this is why a year ago we had an agent scripting where we have offer advisors and there was a need to have a native order capture capability in the RightNow desktop.

Now, we are not the order processing system today. So this initial release in the November ’09 version will be a native order entry screen built by RightNow that initially connects with Sterling Commerce. I would expect that over time and our plan is to connect RightNow order management capability to other order processing systems that our clients have in place.

Operator

That’s all the questions that we do have right now. I would like to turn the call back over to Mr. Gianforte for any additional closing remarks

Greg Gianforte

Okay. Again we are thrilled with the strong quarter in Q3 and strong pipeline going into Q4 and we look forward to seeing those and we’ll make it to the summit next week and thanks for joining us today

Operator

That does conclude today conference. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: RightNow Technologies Inc Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts